Since the oil crash began 18 months ago, it seems almost no energy stocks have been spared from the carnage. I say "almost" because some small, fast-growing midstream MLPs, especially have not just held up better than peers, but has also recorded decent gains. One MLP that has been doing exceptionally well is Valero Energy Partners (NYSE: VLP). Let's take a look at why Valero Energy Partners seems to have some special sauce in its stock while others have struggled.
Valuation: high, but in line with peers
|MLP||EV/EBITDA||Price/Operating Cash Flow||Price/YTD DCF|
Valero Energy Partners
|Phillips 66 Partners (NYSE: PSXP)||33.4||22.0||29.8|
|MPLX (NYSE: MPLX)||13.7||16.2||60.6|
|Shell Midstream Partners (NYSE: SHLX)||38.0||29.6||49.7|
Overall, Valero Energy Partners isn't overly expensive relative to its fast-growing peers, indicating that a strong investment case can be made at today's prices. This is especially true when one looks at its payout profile, one of the most important things income investors need to consider when contemplating buying a midstream MLP.
Distribution profile: one of the industry's best
There are three components to any dividend investment: yield, payout sustainability, and long-term growth potential.
|MLP||Yield||YTD Coverage Ratio||5-Year Projected CAGR Payout Growth|
|Valero Energy Partners||2.5%||1.96||30.4%|
|Phillips 66 Partners||3%||1.87||30%|
|Shell Midstream Partners||2.1%||1.72||26.2%|
Valero Energy Partners' extremely strong coverage ratio -- indicating that distributable cash covers the payout almost twice over -- and superb growth potential seem to well justify its lofty valuation.
Not only does the distribution have plenty of room to grow, but that excess DCF the MLP is generating -- $71.3 million on an annualized basis -- combined with the Valero Energy Partners' long-term, fixed-fee contracts with its sponsor and general partner, Valero Energy Corp. (NYSE: VLO), also means the distribution is much less likely to be cut even if energy prices stay low for years. That's especially true given that 85% of revenues are insured by minimum volume commitments with Valero Energy Corp.
Long-term growth potential: great, but not as good as its competitors
|MLP||Debt/EBITDA (Leverage Ratio)||WACC||ROIC|
|Valero Energy Partners||1.0||NA||25.1%|
|Phillips 66 Partners||5.1||13.03%||19.3%|
|Shell Midstream Partners||2.8||NA||46.19%|
Valero Energy Partners' ability to retain a good chuck of cash flow is a great thing. However, on an absolute basis, $71 million in excess cash won't be able to fund the MLP's growth anywhere near enough to live up to its growth potential. In 2015 the MLP made over $1 billion in acquisitions, and in 2016 alone Valero Energy Corp. is planning on investing in $715 million in midstream projects that are likely to eventually be dropped down to Valero Energy Partners. So Valero Energy Partners will need plenty of debt and equity financing.
Fortunately for Valero Energy Partners, its balance sheet is one of the least leveraged in its industry, giving it some room to add some debt. Also with its share prices remaining high, it can raise cash from equity at much more attractive rates than its peers.
But Valero Energy Partners' long-term future dropdown potential is smaller than those of its peers. For example, MPLX, in addition to dropdowns from its sponsor, Marathon Petroleum Corp., now has the benefit of MarkWest's dominant position in the Utica and Marcellus gas shale formations, which provides billions in additional investment opportunities.
Meanwhile, Shell Midstream Partners has all of the global midstream assets of Royal Dutch Shell -- the world's third largest publicly traded oil company -- that it could potentially acquire, which could fuel decades of strong distribution growth.
Valero Energy Partners has a lot going for it. Its payout is rock solid, it's throwing off tons of excess cash, and thanks to its rampant growth and squeaky clean balance sheet, it has plenty of access to both cheap debt and equity growth capital.
Over the next five years, I believe that this MLP will reward dividend growth investors with impressive income and capital gains, even if bought at today's prices. However, I its ultimate long-term asset growth potential is smaller than those of fellow refiner/integrated oil & gas sponsored MLPs.